Even Fraud-prevention Specialists Are Not Immune to Schemes
When Experts Become Victims
By Julie Quink
As professionals who counsel clients on best practices relative to fraud prevention and detection techniques, we unfortunately are not immune to fraud attempts as well.
The schemes that individuals and companies have fallen victim to are many, but here are two schemes we feel are important to mention for which we have recent personal experience.
The Fake Check Scheme
In a fake check scheme, the fraudster can obtain a check for the company and replicate the check using software that can be acquired easily on the Internet. The replicated check may look like an authentic company check written to a legitimate vendor.
By creating a replica of a legitimate company check, the fraudster now can generate a check payable to themselves or another entity for any amount. The check is entered into the banking system, deposited or cashed like a normal, routine check. If the check is negotiated at an out- of-state bank, it can take longer to move through the clearing process, and the fraudster can get the funds before the company or bank, which the company uses, is notified.
In this scheme, the original, authentic check is kept intact, and a fake replacement is generated using the information from the original check with slight modifications.
The Forged Payee Scheme
The forged payee scheme is a scheme whereby a fraudster intercepts a company check paid to a vendor for a legitimate invoice and washes the check to remove the original payee, amount, and sometimes date. The washing is done through a chemical process that removes the unwanted information so that the check becomes ‘blank’ again and can be modified with the information that the fraudster includes.
“It is always best practice to keep blank checks secured and accessible to only those who need access, thereby limiting the opportunity to generate fake checks.”
The original, authorized check signer’s signature is still on the check, so on its face, the check appears authentic to the bank clearing the check, and the fraudster can negotiate the check through deposit or check cashing. On its face, most times the check does not look to be altered or modified, so visually it is difficult to determine that the check is not a valid, authentic check.
Effects of Fraudulent Checks
In addition to the possible loss of company funds to the fraud, a level of business interruption can occur as a result of these schemes. The fraudster now knows the company’s routing information, bank account, name, and other critical information on the check and can continue to attempt to perpetuate the fraud. It is best practice to change the bank account to assist in preventing the fraud from continuing to occur.
Changing a bank account may not seem a significant interruption, perhaps, but if you consider all the transactions that occur within that account, it can be significant. Many companies use outside payroll firms that automatically withdraw funds from their account. Clients or customers may pay their bills automatically through ACH transactions. Vendors may also be paid electronically through the bank account.
The changing of the bank account requires consideration of all the transactions and activities that occur within that account and making the appropriate notifications to those parties to ensure the correct bank account information is provided to ensure continued operations.
Detection and Prevention Techniques
It is always best practice to blank checks secured and accessible only to those who need access, thereby limiting the opportunity to generate fake checks. Internal controls over the check-processing and mailing functions within a company are preventive measures to assist in minimizing the risk of forged payees.
These techniques can include a segregation of duties in the check-disbursement process to allow for appropriate oversight and control over the process.
Keep in mind that potential fraudsters can exist within a company as employees. They can also be external to the company. Consider that it is difficult at best to contemplate when a check, which has been mailed to a legitimate vendor for a legitimate expense, will be intercepted from the time it is mailed to the time it reaches a fraudster and is then replicated. The fraudster could be employed by the vendor that is receiving the company check.
In the age of electronic banking and ease of access to information, it is critical that bank-account activity be reconciled on a recurring, consistent basis to identify any unusual items. In addition, the reconciliation will identify older checks that have not yet cleared through the account but normally would clear in a timely fashion.
Through routine and timely reconciliation of bank accounts, items such as unusual, unauthorized checks can be easily identified and quickly investigated.
Many banks offer a service, which is most commonly referred to as ‘positive pay.’ This service requires the company to send over a check-disbursement list to the bank indicating all checks written. The bank will use the list to determine which checks will clear the company bank accounts. It is a higher-level control that can assist in preventing unauthorized checks.
A heightened sense of awareness and evaluation of internal controls in place, including reconciliations, in addition to feeling comfortable with your banking partners and their controls, is critical to ensuring that your accounts are protected.
Julie Quink, CPA is managing principal of the West Springfield-based accounting firm Burkhart Pizzanelli; (413) 734-9040.